Russia: a brief market watch

RUSSIA ECONOMICS - In Brief 03 Nov 2022 by Alexander Kudrin

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Liquidity in the domestic market remains muted as a significant amount of cash was withdrawn from the banking system during partial mobilization. Given that interest rates on the retail deposits are relatively low, the return of these funds to the system may take much more time than was in March-April. Besides that, the active placement of OFZ (see below) also fueled a temporary shift of money from the banking system to government accounts. The equity market bounced back as local investors became less nervous after the announcement that partial mobilization was over (at least for the time being). The Finance Ministry started to place OFZs quite aggressively. Apart from active issuance of floating-rate papers (R257 bln in two weeks), it offered investors long-term bonds with a double-digit fixed rate. The aggregate amount of the latter's placement reached R93 bln in three auctions. The premium (on yield) during the recent issuance of 14-year OFZs, approached 85 bps (based on the cut-off price), which is very high. Previously Minfin refrained from paying such premiums and preferred not to tap the market during periods of volatility. Currently, the situation seems different, as the budget deficit increases and borrowing become necessary. As a result, the yield curve on the secondary market is moving higher, which brings new losses to the bondholders. If Minfin continues paying premiums, the demand for fixed-rate papers may evaporate. At the same time, banks are still looking to buy floaters as this helps to hedge interest rate risk. Inflation w-o-w remains low, and the m-o-m inflation in October can stay just above 0.2%. If so, then inflation y-o-y may fall to 12.7%, i.e....